Do you want to know how insurance companies manage risk? If YES, here are 4 iron-clad ways insurance companies manage risk and still remain profitable.
Risk management in the insurance industry is the identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the impact of unfortunate events or to maximize the realization of opportunities.
In much simpler terms, risk management in the insurance industry is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters.
Insurance business is quite risky as it involves people making claims when they get into one scrape or the other, major or minor. Without proper management of risk, an insurance company is likely to get wiped out in the first year. This is why insurance companies try their very best to mitigate their risk.
4 Iron-clad Ways Auto Insurance Companies Manage Risk
- Risk underwriting
Underwriting is the process of evaluating the risk of insuring a home, car, driver or individual in the case of life insurance or health insurance, to determine if it’s profitable for the insurance company to take the chance on providing insurance. In insurance, underwriting risk may arise from an inaccurate assessment of the risks associated with writing an insurance policy or from uncontrollable factors.
Insurance companies employ underwriters who are trained insurance professionals who understand risks and how to prevent them. These people have specialized knowledge in risk assessment and use this knowledge to determine whether it will be safe for an insurance company to insure something or someone, and at what cost.
The insurance underwriter is the insurance company’s appointed risk taker, the one who decides to take on the financial responsibility to the insured if he believes in the risk. He or she reviews all the information an agent provides and decides if the company will be able to take a gamble on the client.
By underwriting risks, insurance companies ensure that they only insure less risky people or properties so they themselves would not be so much exposed to risk.
A lot of underwriting is automated, so in cases where the situation doesn’t have a special circumstance, the underwriting may be programmed into computer programs, similar to the kind of quoting systems you might see when you get an online insurance quote.
- Non-renewal of insurance
Car insurance non-renewal is a situation where by a car insurance company chooses not to renew a particular policy at the end of its term. This is one of the ways car insurance companies insure themselves against risks. If they estimate that a particular client has proven to be very prone to risk or risky behavior, they can discontinue his or her coverage. This is legal and lawful.
An insurance company usually gives the client a certain number of days notice and explain the reason for not renewing before it drops a policy (the exact timeframes and rules will depend on the state in which the insurance company is situated). Insurance companies issue non-renewals to clients for one of three reasons.
- Driving Record: If a client has recently received a DUI or have been racking up the speeding tickets, there is a good chance that they will be seeing a non-renewal notice from their insurance carrier. Insurance companies often non-renew drivers with bad driving records because the likelihood of a large claim is high. Preferred insurance carriers will not insure high-risk drivers because the potential risk is detrimental to their other clients.
- Claims: Multiple at-fault claims can warrant a non-renewal letter from an insurance carrier to a client. The typical rule when it comes to insurance is that the client should not have three at-fault claims within three years of each other. Once you file a third at-fault claim within three years, more than likely you will be receiving a non-renewal notice.
- Move Out of State: The majority of insurance agents are only licensed in one state. Insurance policies need to be issued in the state the person who owns the vehicle resides. If an insurance company is notified of a client’s move out of state, they will be non-renewed.
Once an insurance company insures a client, deciding whether to keep them or non-renew them is another way of controlling risks.
- Insurance coverage limits
In order to keep costs reasonable, insurance companies usually set insurance limits of liability. The coverage limit by definition is the maximum amount that the insurance company will pay out for a single incident or claim. In general, higher limits will result in a more expensive policy. By choosing the limit they can pay out on every claim, an insurance company can effectively manage their risks.
- Reinsurance
Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself from the risk of a major claims event. With reinsurance, the company passes on some part of its own insurance liabilities to the other insurance company.
Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer. In other words, it protects insurance companies from financial ruin, thereby protecting the companies’ customers from uncovered losses.
Also, an insurance company can buy reinsurance if their annual maximum in payouts is exceeded due to an event maximum, such as a Hurricane or Tornado or Hail or Fire. Reinsurance is another way insurance companies manage their risks so that they don’t go under.